Can't Afford Your Losses? Hide Them!

Good Afternoon Folks!

This was the message that the DC sent to Wall St. today:

"Kanjorski Convenes Hearing to Address Problems Facing Mark-to-Market AccountingWashington, DC – Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today announced that the Subcommittee will hold a hearing to examine the mark-to-market accounting rules that many contend have exacerbated the current troubles in the financial industry and in the broader economy. The standard requires companies to value assets they hold at current market values. For assets that are frozen and have a diminished current market value but may recover value in the future, the standard has proven problematic. Companies are then forced to write-down billions in assets, which can lead to further write-downs elsewhere.

“Illiquid markets have resulted in great difficulty in valuing sizable assets. Some have therefore complained about fair value accounting and sought to eliminate it. While companies need stability, investors still need accurate information. We therefore cannot allow for fantasy accounting that wishes away bad assets by merely concealing them,” said Chairman Kanjorski. “As a result, we will seek at this hearing to engage in a constructive, thoughtful conversation with a diverse range of viewpoints aimed at identifying fair-minded, incremental, and achievable fixes to this problem. In short, I want to find a way – within the existing independent standard-setting structure – to still provide investors with the information needed to make effective decisions without continuing to impose undue burdens on financial institutions. Each of our anticipated witnesses will have the opportunity to contribute as we all pursue consensus solutions together to this thorny, contentious issue.”

My Take:

This is all you need to know in terms of what happened in the markets. I watched this hearing today, and I must admit that I was pretty sickened at the display that I saw. My take here is the pressure is mounting on the politicians to fix this disaster. They are beginning to panic because they have no clue in terms of what they need to do in order to resolve it.

Its obvious that our government is leaning towards hiding more sausages via bad accounting versus taking the pain and fixing the problem. The way I see it. this economic fraud will be taken to another level if they suspend mark to market accounting. This will all end very badly in the long run as I will explain below. In the short term however, the market may very well skyrocket on this news.

And why wouldn't the market jump? I mean if you don't have to mark your books and record losses how can you lose? This is why you saw another parabolic move in the markets today. The politicians sent a clear message that our accounting standards will be changed so that Wall St doesn't have to mark down assets in which there is no market for.

Now, I admit that something does have to be done with assets here from a relief standpoint. Its not fair to force companies to write an asset down to zero because there is no market for them if they have some value. The easiest answer here if you actually wanted to actually fix this mess is to create a market for these assets by dropping the price until they are sold. Once you establish a price by selling an asset: Presto! You've created a market!

This isn't rocket science here folks! We have all seen how this process works. If you have ever bought a house you know exactly how it works. You made an offer on your house based on previous sales. This is how you establish what something is worth.

The problem here is the pigmen think these assets will be worth more down the road so they don't want to sell them now. I mean why would they? Selling any asset during a severe recession is a bad time to sell. Personally, I believe that some of these assets like MBS are worthless but that's besides the point.

So what do we do to fix this dilemma?

If we were ACTUALLY a free market country, we would force the banks to sell assets to buyers at prices in which they are willing to pay. If they decided not to sell them, You wouldforce them to open their books and provide transparency to investors and prove that they are legit. If the math doesn't work between assets and obligations after opening the book? Its time to call the bankruptcy attorney!

Of course this isn't DC's answer: Since we are now all socialists in this country, we have decided against using transparency in order to find a solution. I mean why do that when you can create fraud and hide everything? In a nutshell here is their solution: You put your head in the sand, let the fraudsters hide their losses, and you say to yourself "this will all work out!

Bzzzt: Wrong answer Washington.

It all works out until a company can't pay their bills anymore. Anyone remember a company called Enron? This is what you end up with down the road folks when you start messing with the books. The market loves to hear this M2M news NOW because its DESPERATE to find an answer to this mess. It appears that neither Washington or Wall St is ready to face the reality that we need an economic "reset".

Reality is coming whether you like it or not folks because this solution is not sustainable. Nothing will be fixed and the market will still be broken if we suspend honest accounting. This just kicks the can down the road a little bit further. As far as I am concerned, consider this to be just another reshuffling of the chairs on the deck of this economic Titanic!

Bottom Line:

We could see a massive rally on this news folks. Step out of the way and let this moonshot run its course because this move has the potential to fly. The risk here if you are short at these levels is you see another wave of buying as investors start piling back in to equities thinking that they are "missing the big move". Three straight up days will bring many bulls back into the party.

This "we are well capitalized" message coming out of the big banks seems a little too well coordinated. Usually the more they scream about how well their doing, the more I get concerned that the reality is the exact opposite.

Need cash? Sell the rally

This big move gives you a great opportunity to sell any dog stocks that have dragged down your portfolio. It also offers a great oportunity to raise cash.

I wish I could tell you that its time to buy stocks because this disaster has been avoided. Feel free to believe and do it. As for me? No thanks, I will stay in fixed income because we aren't fixing the problem.

Ignoring the problem is not a solution. This crisis isn't gonna just "go away". It must be dealt with! Ignoring this fact sets up a scenario in which companies are allowed to stay solvent when they are in fact broke. This means that "everything is fine" until they run out of cash. Once this happens the stock heads straight to zero folks.

Watch out once these blowups begin to inevitably occur as a result of accounting changes. Investors will immediately start flying out of equities when somebody blows because no one will know the solvency of any company because they can't see the books!

Don't think that it can't happen folks: Another Enron WILL inevitably appear as a result of this deadly recession. WHEN this happens, expect every investor to bail and sell sell sell. They won't ever come back until everything is marked to market. Bottom line here is you end up with transparency no matter which path you take.

If this is the case then lets mark to market already and get this over with! This massive "denial" stage is just going to take longer and make it even more painful then it has to be.

I wish I could ask Congress this question: How does more "smoke and mirrors" games instill long term confidence and credibility back into the system? Let me take a stab at this answer: It doesn't! This is why this solution won't work.

I understand that we need to give our corporate critters a little room on the books so that they aren't forced to mark assets to zero when they do have real value because there are no buyers. How much is a "little"? God if I know, but anything more than a "little" puts the financial system at risk via an Enron type collapse.

Hold on tight folks! The panic that I saw among our politicians faces today was really remarkable. Long term the risks to the financial system just increased significantly. Be nimble if you play the long side because everything is still extremely fragile. When the new accounting methods are explained you may see a "sell the news" type scenario.

The markets are now nearly impossible to trade as a result of these massive government interventions. The new accounting standards will make it even HARDER to trade because no one will be able to value anything. In other words: The markets have become a frickin casino thats now moved by DC interventions instead of earnings.

I will say it again. Raise cash!